Options Trade – Google Inc (NASDAQ:GOOG) Calls - Monday, July 14, 2014

**OPTIONS TRADE: Buy the GOOG Sep 2014 650.000 call (GOOG140920C00650000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $4.00.

by Ian Harvey

July 14, 2014

Introduction

Technology giant, Google Inc (NASDAQ: GOOG) will report its second quarter results after the market closes on July 17. The stock has risen a modest 4.0% on the year. Analysts have forecast quarterly earnings of $6.25 per share on revenues of $15.6 billion.

Google's strong leadership position in the global search engine marketplace has enabled the company to consistently grow revenues and earnings. Google's dominant position in search will drive big upside in mobile-based revenues. The company has significantly increased its efforts to grow mobile advertising revenues, and these efforts are likely to pay off big time in the future.

Google's robust search engine gives the company a huge moat, as the company has a global search market share in excess of 67%, and the company's highly targeted search ads have resonated heavily with advertisers. Google query-driven search advertising platform is not only a great product for brand advertisers, but also for local and small advertisers as well. Google's continued dominance in the search engine space is a great positive for the company's revenues and earnings. In May 2014, Google had 12.5 billion unique searches, according to comScore, well ahead of Microsoft's Bing and Yahoo!

Last quarter, the company saw paid clicks grow 26% year over year, but cost per click was down 9% year over year. In other words, Google is selling a lot more ads, but at lower prices, resulting in a growing revenue stream from mobile search. While this might be perceived as a bad thing, Google's founder and CEO Larry Page has stated in quarterly earnings calls that he expects mobile ad pricing to increase in the long term.

Owing to such an outsized position in the search engine space worldwide, Google is taking home almost half of all advertising revenues from the mobile ad space.

Earnings

Google last posted its quarterly earnings results on Wednesday, April 16th. The company reported $6.27 EPS for the quarter, missing the Thomson Reuters consensus estimate of $6.44 by $0.17. The company had revenue of $15.40 billion for the quarter, compared to the consensus estimate of $15.51 billion. Analysts expect that Google will post $26.78 EPS for the current fiscal year.

Analysts Opinions

In a report dated July 10, 2014, Bernstein analysts Carlos Kirjner and Peter Paskhaver said they expect Google's Network revenues to reaccelerate in the company's next earnings report. They note that it has been a year since Google made the changes in policy that led to a slowdown in this area. The Bernstein team thinks Google Sites will show sustained growth of 21.5% on a foreign exchange neutral basis. They see search advertising revenue growth as being the main driver. At worst, they think the growth rate of search ad revenue will gradually decline over time.

They remain ahead of consensus on their margin estimates for Google. They're expecting the search giant to break down its click and cost per click growth rates for both Google Sites and Network. They think some investors are expecting disclosures that O&O search and cost per click are beating the average cost per click.

The Bernstein team says it's possible but not likely that the Ad Exchange's rapid growth and loss of search clicks in the network have negatively impacted aggregate cost per click growth by a significant amount. They expect Sites to be better than reported previously, which could help investors better understand the evolution of Google's search business.

They're looking for $15.89 billion in revenue and non-GAAP earnings per share of $6.23 per the quarter. That compares to consensus estimates of $15.6 billion in revenue and $6.24 per share in earnings.

Also, the company has been the subject of a number of research reports:-

• Analysts at Citigroup Inc. raised their price target on shares of Google from $675.00 to $686.00 in a research note on Friday, June 27th. They now have a “buy” rating on the stock.

• Separately, analysts at Barclays initiated coverage on shares of Google in a research note on Thursday, June 26th. They set an “overweight” rating and a $650.00 price target on the stock.

• Finally, analysts at Deutsche Bank reiterated a “buy” rating on shares of Google in a research note on Sunday, April 20th. They now have a $625.00 price target on the stock.

Conclusion

Google has a major durable competitive advantage as it is the gateway to the Internet, which gives the company a large number of advantages related to monetizing user traffic.

As a result, the company will be able to earn significant amounts of revenues from the growing mobile ads market. The company's top line will benefit immensely from these secular drivers, and as a result, Google should continue to see healthy growth in its earnings per share, which will push the company's stock price higher in the longer term.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the GOOG Sep 2014 650.000 call (GOOG140920C00650000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $4.00.



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